JAKARTA - PT Indosat Tbk (IDX:ISAT) has just released its fourth quarter and full year 2015 results. Following is the research report of Bahana Securities:
- Rating: BUY (unchanged)
- Target price: IDR7,300 (From IDR6,800)
- Share price (24-Mar-16): IDR6,300
§ Raising 2016-17F net earnings on improved prospects: Due to several one-off expenses, ISAT reported a disappointing 4Q15 net loss of Rp 188 billion, resulting in 2015 net loss of Rp1.3 trillion, slightly worse than our expectation of Rp 1.2 trillion net loss. However, as most of the disappointments were due to one-offs in depreciation, cost of services and marketing, we increase our 2016-17F net profit by 7-8% (exhibit 5), helped in part by our expectations of higher revenue in 2016.
§ Solid revenue growth expected to persist: ISAT booked in-line 4Q15 revenue growth of 13% y-y and 3% q-q to Rp7.2 trillion, on solid voice (+2% q-q and +4.4% y-y) and data (+13% q-q and +57% y-y) revenue. In 2016, we expect growth to continue as ISAT is offering several attractive packages to improve data usage. Thus, we raise our 2016-17 revenue growth expectations from 8-9% y-y.
§ Maintaining EBITDA margin forecasts: ISAT booked 4Q15 EBITDA of Rp2.6 trillion, -9% q-q but +19% y-y, reflecting 4Q15 EBITDA margin of 40.4% (3Q15: 46.0%; 4Q14: 38.3%). However, excluding the one-off expenses from marketing and cost of services, ISAT would have booked 4Q15 EBITDA margin of 45%. Interestingly, ISAT’s 4Q15 ARPU improved to IDR27.9k/month, +4% q-q, despite a higher customer base of 69.7 million, +1% q-q and 10% y-y. Thus, we maintain our 2016-17 EBITDA margin expectations at 43%.
Outlook: Earnings recovery expected from 2016
At this stage of the market cycle, we expect competition in the telco sector toremain rational, allowing for higher data pricing, which is the key to developing data infrastructure. That said, we expect data usage as well as higher ARPUs to support ISAT’s revenue growth. Furthermore, we believe that the two new policies, which are network sharing and lower interconnection, will benefit ISAT as it can lower ISAT’s operating expenses.
Thus, we believe that ISAT will improve its efficiency through several initiatives such as cost structure improvement, active network sharing and network monetization. We expect normalized depreciation expense going forward to result in higher net profit, allowing for earnings recovery to Rp 1.4 trillion in 2016, before jumping 89% y-y to Rp 2.7 trillion in 2017.
Recommendation: BUY with higher TP on strong earnings momentum and valuation
In line with our increased revenue, EBITDA and earnings forecasts from 2016, we expect ISAT’s 5% market outperformance ytd (exhibit 4) to persist. ISAT currently trades at what we view as an attractive 2016F EV/EBITDA of 4.0x, 54% discount to the sector’s average (exhibit 7); hence, we increase our 12- month target price from Rp6,800 to Rp7,300 (DCF-based, 12% WACC), reflecting a 2016F EV/EBITDA of 4.4x, around a 50% discount to regional peers.
We reaffirm our BUY call on expectations of solid revenue growth, stable EBITDA margins and 16% upside potential to our target price. Risks to our call include weaker-than-expected purchasing power and IDR as well as greater-than expected competition. (*)